Business financing and the capital structure Assignment

Business financing and the capital social organisation - Assignment ExampleCompanies can either decided to use equity or debt or a combination of the both. Whichever source is chosen the following should be noted Debt finance is a source that earns a fixed return (interest) to the lender. The interest is fixed at the par value of the debt (face value). This source of finance is nonsuch to be sought by a company that has a strong base of equity. Debt funding is whole available to qualified companies based on credit ratings, and its availability is limited to the value of the security provided (Chandra, 2011).Advantages of exploitation debt finance first, the interest charged on the debt is tax allowable. Second, the cost of debt is fixed regardless of the profits make by a company and due to that, under high profits, the cost of debt becomes lower. Third, it does not involve many another(prenominal) formalities and due to that, it is suitable when a source of finance is required urgently. Fourth, if the debt is long-term, the amount owing declines with time, and so reduces the repayment burden to the borrower. Fifth, this type of finance does not influence a companys finding since creditors do not participate in the annual general meeting (Chandra, 2011).Disadvantages of debt finance first, it can simply be invested with the lenders approval. Second, when used in excess, the creditors might demand a representation on the Board of Directors. The representation might affect a companys decision-making. Third, it is risky to use it during an economic decline because its usage might send a company into receivership. Lastly, it is only available for specific ventures, then might affect the flexibility of the companys investment strategy (Chandra, 2011).Equity capital - it is embossed from the public through the sale of ordinary shares. This source of finance is available exclusively to Limited Companies. It is a changeless finance source, as the sharehold ers cannot review this cash except under liquidation. It is, along these lines,